Softening conditions in the credit and housing space has sparked debate among market analysts regarding the cause of the downturn, with some stakeholders, including governor of the Reserve Bank of Australia (RBA), Phillip Lowe, claiming that the “main story” of the downturn is one of “reduced demand for credit, rather than reduced supply”.
Mr Lowe claimed that falling property prices have deterred borrowers, particularly investors, from seeking credit.
According to the Australian Prudential Regulation Authority’s latest residential property exposure statistics for authorised deposit-taking institutions, new home lending volumes fell by $25.1 billion (6.5 per cent) over the year to 31 December 2018. The decline was driven by a sharp reduction in new investment lending, which dropped by $17.7 billion (14 per cent), from $126.9 billion to $109.2 billion over the same period.
However, the ANZ CEO has told the House of Representatives’ standing committee on economics that he believes the downturn in the credit space has been primarily driven by the tightening of lending standards by lenders off the back of scrutiny from regulators and from the banking royal commission.
Liberal MP and chair of the committee Tim Wilson asked: “Is the reported credit squeeze more demand-driven by borrowers pulling back or supply-driven by banks being more conservative?”
To which Mr Elliott responded: “This is a significant question that’s alive today, and there are multiple views on it. I can’t portion between those two.
“I’m probably more in the camp that says conservatism and interpretation of our responsible lending obligations and others has caused a fundamental change in our processes, and that has led to a tightening of credit availability.
“It’s a little bit ‘chicken and egg’,” Mr Elliott added. “If people find it a little bit harder to get credit, they might step back from wanting to invest in their business or buy a home, so I think they’re highly correlated, but I do think banks’ risk appetite has had a significant impact.”
Mr Elliott said that “vagueness and greyness” regarding what’s “reasonable” and “not unsuitable” as part of the responsible lending test have left the law to the interpretation of lenders.
“Unfortunately, we haven’t always had the benefit of a significant amount of precedence or court rulings on some of those definitions, so we’ve done our best,” he said.
“I think the processes recently, the questions that this committee has asked, the questions in the royal commission, have started a debate, not just with the regulators but with the community about what is the real definition of [responsible] lending.”
He added: “As a result of that, we’ve become more conservative in our interpretation, and so we’ve tightened up, [and some] Australians will find it a little bit harder to either get credit or get the amount of credit that they would have otherwise had in the past or would like.
“I’m not suggesting for a minute that it’s wrong, it’s just the reality.”